Illinois Drops Bomb on Subject 2

Papa H. owned a property in Illinois. He was on the mortgage loan with a balance of $55K. Sometime prior to his death in 1999, he signed the property over to his two sons via a trust deed.

Later, Brother #2 transferred his interest via a quitclaim deed to Brother #1, who made timely payments on the home for five years. Brother #1 then fell behind in his payments and, on 9/3/2003, he was told in writing by the bank’s lending officer that they were aware he was making the payments and that as long as he kept them current, refinancing was unnecessary. He had $25K in equity.

Then in July, 2004, the bank foreclosed under the Due-on-Sale-Clause contending that Brother #1 obtained ownership without the knowledge or consent of the bank. Brother #1 filed a bankruptcy to try to protect his home.

The bank and debtor agreed that the due on sale clause could not be invoked in this case due to the Garn-St. Germain Act of 1982, which prohibits enforcement of the DOSC when the property is transferred to a spouse or child who will occupy the property. 12 U.S.C.A. #1701j-3(d)(6).

However, the Court ruled that because Brother #1 was behind in payments, the bank had the right to accelerate the loan and call it due. They said that because Brother #1 had not signed the mortgage note, he did not have the rights contained therein, specifically the right to cure the default. They held that, “the creditor’s rights are defined in the mortgage instrument and because there was no mortgagor-mortgagee relationship, there can be no cure.” They said: “The Garn-St.Germain Act’s prohibition of enforcement of a Due on Sale Clause does not operate as a means to modify the rights of a creditor with respect to a debtor who was not a party to the mortgage.”

In other words, if you acquired a property “subject to” the existing mortgage, you had better make sure the payments are kept up to date or you will have no right to cure the default and no defense to the implementation of the Due on Sale Clause.

Decision handed down on 5/17/2005.

In other words, one incident out of thousands and thousands is how Mtnwizard is trying to put enough fear to new investors so they will use the NARS trust, of which he is a paid consultant. YES, I know it wasn’t mentioned in this post, but I know your game: wait until someone asks how to avoid this, and then start with the NARS explanations. Sorry, you are not fooling anyone. This is similar to many of your threads and posts, full of fear and misleading comments.

Do NOT let Mtnwizards scare tactics and half truths affect how you do business. That is the REAL moral of his post, as I read it. Nice try Wiz. Your board hustling game is getting pretty old. The majority of “ETHICAL” investors will keep the payment current anyways, so this is a non issue too.

This post is full of misleading interpretation. and it does NOT mean this will happen every single time. This is ONE INCIDENT. The fear you are attempting to put into sub 2 deals will not work.

If someone wants to use the NARS trust, that is ok, but they don’t need to constantly be bombarded with scare tactics to drum up interest. This post was unnecessary. Just because one did it, doesn’t mean all will. The DOS is a NON ISSUE 99.9% of the time. if you want to build a moat with fire breathing dragons because of .1%, go ahead and waste your money. I’d rather keep mine.

Scared? You always post that the DOSC is a non-issue and everyone here knows that I have NEVER taken a cent in pay as a Certified Trust Consultant. That simply means I completed Bill Gatten’s training course which is certified by the Calif. Dept of Real Estate. I acquire and manage properties using the land trust. I don’t sell it. Nice try.

Here is what Bill Gatten says about the DOSC:

"As far as the Due-on-Sale issue is concerned, the DOSC is definitely a threat and I couldn’t care less about what anyone says to the contrary…they are wrong. It is indeed thing to be reckoned with and avoided when possible. Sure, most lenders will look away when the market is hot and interest rates are low; and if one can sell or refi if the note is called, then the DOSC is not of much concern. However, like many of my students, in my first several years in this business I had no credit or money and would have been in very deep piggy-poo had I received any more foreclosures than I did ('lost two properties to due-on-sale calls in the early years). Furthermore, I have recent foreclosure demands on file from Countrywide and Washington Mutual that were thwarted by our explanatory letter indicating that the subject properties had not been sold, but were merely vested in inter vivos trusts and being leased to one of the beneficiaries. "

Da Wiz

Rule of Life #6: If you don’t pay your bills, they take your stuff.

This is true whether of not a Sub2/NARS/Bill Gatten/Bobo/MtnWizard has happened or not. This case has more to do with non-payment than it does with the DOSC.

Pay you bills. Period.


Hi Keith,

You are only partially correct. This would not occur with a land trust as the owner/seller ALWAYS remains a beneficiary of the trust.

You are right in that it has to do with a default in payments. However, this also results because the deed was transferred from brother to brother and they considered that to be a sale. The danger to subject to people is that it takes away their right to cure a default and does show that banks are willing to invoke the DOSC.

Da Wiz

So, are you telling me that if I put my properties in a trust, I don’t have to pay the mortgages? This is a rhetorical question not really requiring an answer on your part.

I think that there are several things at work here…

(1) The foreclosure process is long and expensive. Perhaps invoking the due on sale clause is easier/quicker

(2) Invoking the DOSC would allow the lender to more easily take the property and the subsequesnt equity.

The bottomline remains that the lender invoked based more on non-payment than on the property transfer.


Hi Keith,

Of course you have to pay the mortgage, but because there has been no transfer of ownership of the property, and the seller is still a beneficiary of the trust, the ability to cure the default remains. That’s all I was saying.

As to the timeframe, you are exactly right. It is easier for the lender to invoke the DOSC than to foreclose, and I truly believe that as interest rates rise we will see it more and more, just as we did in the '70’s and '80’s.

What people don’t realize is that banks spent millions of dollars fighting with consumer groups to get Garn-St.Germain passed in 1982. It entitled them to be able to invoke the DOSC. Of course their wealthiest investors were people who use land trusts to keep their transactions private. The Banks allowed the exemption to placate them, as well as wealthy congressmen in order to get their vote. That’s why land trusts are legal, and it is also why people need to take the threat seriously. I am not a purveyor of doom. Very few DOSC’s are invoked right now. I am just saying that people need a Plan B when the tide comes in.

Da Wiz

The ultimate pitch man…

There are way too many IF’s.

The Bank did not care who was paying…as long as they were paying. Being that they stopped paying is when the problems started.

By placing it into a trust is not going to stop crap if you don’t pay the mortgage.

Face it, its the only way to conduct business…PAY YOUR BILLS and you won’t have to face this.

B-I-N-G-O, Dm!


D Miller,

You are right, the mortgage must be paid. However, when we use a trust, we also use a triple net lease wherein the tenant/beneficiary pays three months lease payments in advance, two of which are held in a reserve account in the event a payment is late or in default.

If that occurs, we use those two payments to keep the mortgage current while we evict the tenant and replace him/her with another. There is no such protection with a subject to transaction. BINGO!

Da Wiz

Actually, the reason you have extra payments in your trust is because you put them there by requiring that your tenant pay 3 months in advance. That protection is not a function of the trust, it is you putting the money there. If you didn’t want to do that, you wouldn’t have to. I can do the same with a sub 2.

Once again, you try to pump up the trust by blatanly making up things that just aren’t true. The seller is no more protected in a trust than he is in a typical sub 2 deal. The ethics of the investor will determine if he is protected. I can guarantee an unethical investor could screw the seller just as easy in a trust as out of one.

Another useless comparison.


You continue to demonstrate your lack of knowledge of the trust. You said, “The seller is no more protected in a trust than he is in a typical sub 2 deal. The ethics of the investor will determine if he is protected. I can guarantee an unethical investor could screw the seller just as easy in a trust as out of one.”

You’re right in that an unethical investor could screw the seller – if they did something stupid, like name themselves trustee, etc. But, when I am talking I’m talking about handling the transaction ethically and legally at all times.

Sure you could put 2 payments in reserve in a subject 2. It makes good business sense. We do to protect the seller and our investment on every transaction. Don’t you?

The seller sets up the trust in HIS name at no cost to him, and his non-profit corp Trustee MUST protect his interest. He remains a beneficiary throughout the life of the trust and his property is never at risk until he has received his agreed upon equity and the mortgage has been paid off. The seller is well protected.

Da Wiz

Just thinking,

“Brother #1 had not signed the mortgage note, he did not have the rights contained therein, specifically the right to cure the default.”

Niether does the Trustee have the right to cure the default as he did not sign the mortgage either.

So the same thing applies in a trust or out of a trust. Here again just make the payments on time, period.

John $Cash$ Locke

In the unlikely event some Newbie structured his trust incorrectly and didn’t take reserve payments, etc., the bank would rely upon the Acceleration Clause, not a DOSC violation. The way I read the law, ANYONE not a party to the original contract may be precluded from correcting the default. That is why I brought up the fact that it is very unlikely with a trust given the reserve payment fund.

Speaking of setting up a fund in case payments are not made or made on time, for many years I have recommended using a License and Bonded Loan Servicing Company with a minimum reserve fund of 2 monthly payments.

The investment to set this up is around $50 and $7 dollars a month per check. At the end of the year they also send out 1098’s so your buyer can claim the interest on their taxes.

Trying to figure out why paying all your up front lease payment money to set up a trust with paying 1% of FMV of the property and paying $40 a month to a Trustee is any better.

Seems to me after getting only 3 months worth of payments up front from a tenant, you might come out of your pocket just to set this type of method up.

John $Cash$ Locke

If that was ALL I was receiving upfront you may be right. It is not and neither are you. Geeezzzz!

Da Wiz

wherein the tenant/beneficiary pays three months lease payments in advance,

John $Cash$ Locke

In addition to “closing costs”, which will include my cost for setting up the trust for the seller, any costs of advertising, etc., plus some for the pocket if I so choose. Lots of flexibility.